The last Fed meeting of 2014 will conclude today, Fed Chair Yellen will hold a press conference following their policy decision, and the committee will provide an update of economic projections (the last update came after the September meeting).
We should not expect much change from the last statement, as the economy continues to move at the same (or even a slightly better) pace. The committee will surely recognize the steep drop in crude oil prices, which will provide a nice tailwind for the US economy in 2015 and beyond – IF they stay low.
Further, the strengthening numbers in employment will be recognized but not overemphasized until the considerable slack in the labor pool is soaked up. Chair Yellen has noted recently there is still more work to be done here. Without a QE to provide an economic stimulus, the Fed is just down to extremely low interest rates, and at some point in the near future, they will have to pull that accommodation. This will be done very slowly.
In the past, rate hikes have been swiftly implemented in cycles to combat potentially dangerous inflation. This time, however, we are not battling inflation, but if economic projections and inflation forecasts rise today, then we can expect small rate hikes to start occurring in 2015. Some estimates have put inflation at 1-1.5% for 2015, which is not a reason to hike rates. In fact, the Fed might consider other tools to stoke inflation.
The world will have its eyes on the Fed, as today’s comments and outlook could set the stage for other central banks (even Russia, which is suddenly struggling). While an accommodating Fed policy can be a stimulus to the US and other economies due its sheer size, it cannot save countries that are in trouble.